Financial Assistance from Commercial Banks

Posted on 27 April 2023 Category : Export India

Financial Assistance from Commercial Banks

Commercial banks play an important role in financing the credit requirements of exporters at different stages of export, viz., pre-shipment and post-shipment stage. Granting of short-term finance for working capital requirements has always remained an area exclusively reserved for the commercial banks. Commercial banks also offer post-shipment finance against deferred payment at a concession& rate of interest together with the EXIM Bank. In recent times, commercial banks have assumed a greater role by promoting projects of small entrepreneurs. The assistance of commercial banks to the exporters can be grouped under two heads:

Fund based Assistance of Commercial Banks:

Fund based assistance is in the form of credit and loans directly extended by the commercial banks to the exporters at different stages of export procedure. The fund based assistance of commercial banks includes:

(a) Pre-shipment Finance: Pre-shipment finance refers to the credit extended to exporters prior to the shipment of goods for the execution of export orders. It is also known as 'Packing Credit'. Such finance is available in the following forms:

Extended Packing Credit Loan.

Packing Credit Loan (Hypothecation).

Packing Credit Loan (Pledge).

Secured Shipping Loan.

(b) Post-Shipment Finance: Post-shipment finance (short-term) refers to the credit extended to exporters after the shipment of goods for meeting working capital requirement. Such finance is available in the following forms:

Discounting of export bills;

Advance against bills sent on collection

Advance against goods sent on consignment basis;

Advance against undrawn balances;

Advance against retention money, etc.

(C) Finance against deferred Payment Export: Export of goods or services against payment to be received partly or fully beyond the period statutorily prescribed for realization of export proceeds are treated as deferred payment’ exports. Finance against such payments is referred to as Deferred Credit. Commercial rate of interest together with the EXIM Bank.

Non-Fund based Assistance of Commercial Banks:

Commercial banks also provide a number of non-fund based services, viz.

(a) Bank Guarantees: RBI has authorized commercial banks to issue guarantees and bid bonds in favor of importers. No prior permission of the RBI is required for the issue of such guarantees except in case of export of capital goods under deferred payments and turnkey projects. Various guarantees issued by banks are:

Bid Bonds: bid bonds issued by commercial banks enable the Indian exporters to participate in various global tenders.

Performance Guarantee: Commercial banks provide performance guarantee for the export of capital goods under deferred payment terms. · Advance Payment Guarantee: They also provide advance payment guarantee for the transactions involving advance payment.

Guarantee for Payment of Retention Money: they guarantee the payment of retention money by foreign importers:

Guarantee for Loans in Foreign Currency: They guarantee the foreign currency loans taken by Indian exporters from foreign financial institutions.

(b) Credit-worthiness of importers: banks undertake credit rating of foreign importers on request from the exporters. They collect detailed information about their credit-worthiness and supply it to the exporters.

(c) Information about Foreign Exchange: Commercial banks provide valuable information on foreign exchange rates, forward premiums, hedging instruments and foreign exchange management.

(d) Dollar Accounts: Under 25% Dollar Account facility an exporter is allowed to retain 25% of the receipts in foreign currency accounts with a bank in India. This account helps exporters to meet payments in foreign currencies.

(e) Documents, Rules and Regulations: Commercial banks also provide advisory services to the exporters regarding rules and regulations about foreign trade procedures, documentation, etc.

(f) Invoicing in a Foreign Currency: Sometimes, foreign buyers insist on invoicing in a foreign currency. In such cases, commercial banks provide necessary information about the marketability of the said currency.

(g) Advising and Confirming Letters of Credit (L/C): Commercial banks also undertake the job of advising and confirming letter of credit (L/C) opened by the foreign importers.

(h) Forward Exchange Contracts: Commercial banks cover the risks of fluctuations in foreign exchange rates by fixing exchange rate in advance for the future transactions. Such rates are known as forward exchange rates.

(i) Currency for Invoicing Services: Commercial banks provide foreign currencies for invoicing services, as all currencies are not readily available and may require prior permission for their release.

(j) Other Services:

Issue of bank drafts,

Collection of payments,

Sending duplicate copies of GR form to RBI,

Issue of bank certificate in respect of export sales value, which is use'. for claiming export incentives.

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